Secutisation volumes have almost doubled in the first six months of this fiscal supported by the improving economic conditions, milder lockdowns, increasing disbursements and collections by non banking finance companies (NBFCs). Rating agency expects the growth in securitisation volumes to continue for the second half of the fiscal as vaccinations pick up pace.

Securitisation volumes in the first half of the current fiscal at Rs 42,200 crore were higher than the Rs 22,700 crore in the corresponding period of last year. ICRA estimates securitisation from loans originated by NBFCs at Rs 25,000 crore in the second quarter of the current fiscal up 65% from Rs 15,200 crore versus the same period last year.

Securitization involves pooling various types of loans such as mortgages, auto loans or personal loans and selling them to investors through a bond or pass through certificate (

) which helps the original creditor to free up cash flows to reinvest in fresh loans.

Investors on the other hand are repaid from the principal and interest cash flows collected from the underlying debt. Higher securitisation means investors are increasingly confident of getting paid back while also allowing lenders to free up cash flows for fresh lending. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

The rise in securitisation is significant because volumes had dipped in the first quarter in this fiscal after the second wave of the pandemic. The rise in volumes is seen as yet another indication of the economic recovery.

“Assuming the retail credit quality holds and is not impacted by any further resurgence of Covid infections, we expect the securitisation volumes in second half of the fiscal to be significantly higher than the first half. ICRA estimates that the annual securitisation volumes could reach about Rs. 1.2 lakh crore for FY2022 which would imply a ~40% increase from the volumes seen in FY2021,” Abhishek Dafria, vice president and group head – structured finance ratings at ICRA.

Traditionally, direct assignment (DA) or bilateral assignment of pool of retail loans from one entity to another has accounted for about two-thirds of total volumes in India. The balance one-thirds share is accounted by pass through certificate (PTC) which are loans are sold to an SPV which issues PTCs. This ratio had changed in the first quarter as investors preferred the security of PTCs to DAs.

“The split between PTC and DA had seen reversal of sorts in Q1 FY2022 with PTCs accounting for half of the volumes instead of one-third. This was because investors, in light of lower collections during second wave, preferred PTCs which offer credit enhancement unlike DAs. The second quarter was back to the traditional distribution between these two securitisation routes. This clearly indicates that investor concerns around collections is ebbing. In the second half of the year, especially in Q4, we expect higher DA transactions from the public sector banks who would aim to meet their priority sector lending targets and have been traditionally comfortable in meeting part of the same through the DA route.,” said Sachin Joglekar, assistant vice president and sector head, ICRA.